Aviva (AV.) shares down 3% despite rise in operating profits

The results show a mixture of debt reductions and the share buyback programme improved the earnings per share for 2018.

Article updated: 7 March 2019 12:00pm Author: Helal Miah

As new CEO takes the helm, Aviva’s operating earnings per share rose by 7% and it will begin to move to a progressive dividend policy.

Short term challenges remain such as Brexit uncertainty.

We continue to recommend the shares as a ‘buy’ for investors seeking income and willing to accept a medium level of risk.

Having only been announced as the new CEO this week, Maurice Tulloch gave a very enthusiastic view of the group’s potential going forward. However, it is the previous years of structural changes that incited a reasonably good set of 2018 earnings per share (EPS) figures. The group’s operating EPS rose by 7% to 58.4p.

Management accredited half of this growth to higher profits from its major businesses, the majority of which are UK based and benefitted from winning more workplace pension schemes and bulk annuity deals. Diversification in their international businesses also helped.

Lacklustre performance cause shares to drop

Despite marginally beating the consensus EPS figure, the shares have still opened lower by roughly 3%, this may be partly down to the fact that another key driver of the improved EPS figure was their share buyback programme and debt reductions, rather than solid improvements in operating performance which only increased by lacklustre 2% to £3,116m.Their investment management division had a somewhat tougher year due to the market conditions, the value of new business fell by 3%. Management admitted that some of the challenges were of their own creation such as the farce over their preference shares last March. They also encountered difficulties over the new migration of their IFA platform to a new supplier affecting service standards.

Hope to re-energise financial figures with structural changes

While operating challenges showed up in the results, investors should be pleased to see structural changes positively impacting financial figures. This has given the management confidence to announce that they are moving to a progressive dividend policy, but there are still short term challenges that have left investors this morning disappointed. The political environment and Brexit is certainly a challenge, while disappointing market performances in late 2018 will suppress fee income. It will also be difficult to repeat the 7% operating EPS growth that we have seen over the last two years.

Our View on Aviva - Buy

With an attractive dividend yield in excess of 6% and changes afoot, we continue to recommend the shares as a ‘buy’ for investors seeking income and willing to accept a medium level of risk.

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Helal Miah

Investment Research Analyst

Helal has spent time as an independent proprietary trader, trading the US equity futures market. He has also helped manage private client, institutional, retail and hedge funds. His qualifications include the Securities Institute Diploma and the Investment Management Certificate.

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